I got home from a fine evening with David Byrne at the Apollo, to a surprising assault from John Ralfe. It’s not surprising to be verbally assaulted by John on Twitter, but it was surprising that John, who had been watching England thrash Australia had initiated hostilities so late into the evening. Here’s the challenge he laid down.

I am not sure why I am to be held responsible for the “wage in retirement” label, but I think John and Sam Pickford have got this wrong. I have been at various events where the CWU and Royal Mail have explained what they mean by “wage for life” and it has always been made clear to postal workers and everyone else that a CDC pension is not guaranteed in the way a DB pension is.

Dishonesty?

I have spoken to a number of postal workers and – without exception – they are clear that what they will be getting will not have the guarantees of a DB pension. But there is an expectation that 100% of whatever is distributable, after expenses , will be paid to members and an understanding that this is a risk sharing arrangement where postal workers can do well in a positive market and not so well when investment conditions are bad. Indeed , certain underlying assumptions in a CDC scheme – such as the mortality of members as a whole can change , leading to lower or higher outcomes than predicted.

If John and Sam don’t think that this has been spelled out to members, they are wrong. They should be careful accusing the CWU , Royal Mail or anyone else of dishonesty.

Lack of Transparency?

Absolutely. The criticism of CDC is not about dogma, it is about a fundamental lack of transparency.

The debate on CDC is being conducted in a most transparent way. The Friends of CDC have a linked in group for people who want to see regular updates on the progress of CDC regulations and discuss (as Kevin Wesbroom and Con Keating do in yesterday’s articles) aspects of CDC which are causing confusion.

We (collectively), are trying to help the discussion along and are happy to be challenged by John, Sam and anyone else.

I can’t think of any other debate on a major pension policy debate, that has been so rehearsed in public than this one.

It is very odd to be accused of not supplying nuts and bolts, when Aon has made its modelling public, First Actuarial has published numerous documents on the CDC model and the Royal Mail, DWP, WTW and CWU have accepted every opportunity to speak about how the scheme will be run.

There is a limit to how much detail people can go into, since nobody but the DWP can decide on the regulations needed to make CDC happen for Royal Mail and it is not sensible for the Friends of CDC to second guess what DWP come up with. In terms of nuts and bolts, we have to remain at the stage of the structural architecture , until we have the floor plans delivered to us.

I have many calls by John Ralfe, to deliver a two or three page document, outlining what CDC will mean for members; clearly such a plan would be speculative and it could lead to members being misled. I do not speak for DWP, nor does the Friends of CDC, nor Kevin Wesbroom. We cannot be transparent about the rules until the rules are published.

“A wage in retirement”

Royal Mail and CWU have agreed to call the new CDC scheme “wage in retirement”. It is a precise wording that relates to postal workers.

There is a difference between a wage and a salary, a salary is paid whatever the conditions, wages are dependent on the input and a reward for time spent. The wage a postal worker will get will be linked to service and the wages he or she earns prior to retirement.

Wiki contrasts wages and salary like this

Payment by wage contrasts with salaried work, in which the employer pays an arranged amount at steady intervals (such as a week or month) regardless of hours worked

The idea of a pension as deferred wages or a “wage in retirement” is generations old. Generations of postal workers have worked on the assumption that a lifetime of service would lead to a retirement wage based on a formula.

This construct has been challenged in most workforces, but not at Royal Mail nor in the public sector nor for many university employees.

To call such a construct dishonest, is to belittle the contract between workers, management, shareholder and taxpayer that has withstood many changes in politics and economics.

It is also to belittle the three pillars agreement reached between unions, Royal Mail and workers in which 90% of CWU members voted for a Wage in Retirement.

It is a great insult to the CWU and Royal Mail as it suggests that they have been dishonest in the representation of the CDC arrangement. This is not how Frank Field and the Work and Pensions Select Committee saw the evidence given by Royal Mail or CWU, nor is it how the Pensions Minister now talks of it, nor how the DWP talk of it, nor how the market sees the agreement.

Royal Mail’s share price has recovered subsequent to the Three Pillars agreement, recovering to the tune of £200m, Royal Mail is returning to the leading group of UK employers and the market continues to see the negotiated settlement as a positive.

In short, if Royal Mail and CWU are pulling the wool over people’s eyes, then they are fooling a lot of very bright and experienced people.

There is nothing dishonest about a “wage in retirement”.

The promise that is being made to Royal Mail workers is of an open collective scheme which is sustainable. The alternatives – an unsustainable DB plan or an unsatisfactory DC plan were not sustainable.

The CDC plan’s sustainability is based on assumptions agreed by Royal Mail and CWU but also by their advisers, First Actuarial, Aon and WTW. Considerable modelling has been done and continues to be done to ensure the structure of the scheme is as fair as it can be.

Any collective scheme , covering 145,000 workers, is likely to get it wrong some time. The trick is to minimise these occasions and maximise the advantages.

While all this is going on, the rest of the British workforce struggles on with the stark choices of drawdown (typically unadvised) or annuity (typically unloved) or of cash in a bank account (typically dissipated). All the noises are that people are having difficulty converting the cash sums they receive from their retirement savings plans, into a wage for life.

This process of converting a cash sum into a wage for life has been called the hardest, nastiest problem in finance. It is a problem we are presenting to hundreds of thousands of people reaching 55 , each year. We are giving them precious little help. It could be called dishonest to call this “pension freedom”.

I don’t call it dishonest, because the people struggling to find solutions to this – are doing so honestly. One way of sorting this problem out is the way that Royal Mail has chosen, to do things collectively.

I think that John Ralfe and Sam Pickford are doing Royal Mail and CWU a great dis-service in their comments and I think they are insulting the 90% of CWU members who voted to have a Wage in Retirement. John seems to be delivering the responsibility for all this at the doors of myself and the Friends of CDC, which is quite wrong.

The abuse of a soapbox

John has a number of outlets for his views, most notably the Times. He has done great work providing technical help to British Steel workers and commentary on a number of recent pension problems.

He has a deep understanding of his area of economics.

But he is abusing his soapbox by calling us dishonest. John has called me and First Actuarial dishonest so many times, he may think he has precedent to do it many times more. He does not.

Simply repeating a falsehood, does not turn a falsehood into a truth.

The use of a wage in retirement

The phrase “wage in retirement” is now in common parlance, and not just among Royal Mail postal workers. It resonates with ordinary people who have always talked about their pay as “wages” and it resonates with ordinary people who have looked forward to stopping working and having a “retirement”.

There may be another type of people who don’t see the need to stop working (they may not have lugged around sacks of post for decades) and these people may regard their way of getting paid as “salary” or “total reward” or something like that.

But “wage in retirement” is a phrase that explains a CDC pension well to postal workers. To call it dishonest is a nonsense, and very insulting.

One issue that has still not been covered, or at least I haven’t seen it, is that the shape of retirement income under CDC does not represent spending patterns / needs and therefore has relatively poor utility value.

This is true John, CDC is still built around the conventional CPI indexation – I think your point is really important.

Drawdown has the flexibility that CDC doesn’t. I don’t think that CDC could or should aspire to that flexibility. It is providing a wage for life – it’s simplicity is its attraction and for those who want a more flexible approach, a detraction!

Henry I think the biggest issue of all is that research from UK and US points to spending patterns where year on year a retiree’s spending reduces by circa 2%pa. So any pension system implicitly or explicitly targeting CPI style increases needs to be questioned.

As the healthy CDC debate on Twitter shows, the question of sustainability of income over lifetime is given far more importance than sustainability year to year to support sustainable real spending – or at least to match some desired target profile for real spending (which may indeed taper at different stages, or even pass through step changes). This aspect of member utility is almost entirely overlooked. But I agree with John Quinlivan above. Financial planners tend to find it is a vital attribute. This applies at the level of total spending but particularly where employer benefits (like state pension) are being relied on as an underpinning for a holistic approach to retirement income.

Not only is this oversight out of touch with reality but the significance attached to longevity risk is also unrealistic. Until the late stages of retirement, longevity risk is far less significant than inflation risk and real asset price uncertainty. So much so that the assumption of a late-stage annuity (functioning like a stop loss) might even include a level annuity (which is clearly not optimal if selected at retirement).

You mention the edge that DC enjoys: flexibility. This is more likely to be a source of utility gain relative to CDC if what I argue is true: that it is the features of the draw rate (albeit a joint problem with asset allocation) that dominate, not longevity uncertainty.

The issue of sustainability year to year is usefully seen as one of tolerance of variance relative to a profile of spending targets which is itself a reflection of the envisaged (idiosyncratic) consequences of breaches of that tolerance. In IDC this is a product of self-smoothing and is deliberate rather than arbitrary. It can be made more or less resistant to uncertainty about the actual asset value path taken. That solution may involve drawing at less than the mean of the expected distribution of possible outcomes in which case upside optionality is created. In CDC, it is arbitrary. There is no scope to make that trade off about the required confidence because the option payoffs would accrue to other people. If income for all has to stay close to the mean expected sustainable rate for the fund, the only give is therefore the variance of the income.

There are other retirement products that have created income streams that do not match required spending targets, typically because they were nominal and spending is real. Examples are level annuities and guaranteed funds. You could create your own reserves to deal with the mismatch – spend less than the income. But that pushes the key problem onto the individual when the intention was to relieve them of it.

On the question of explanation to members, what is needed from a product is the same kind of honesty as an adviser would provide if sharing outputs of a model. If you’re relying on a model to solve the joint problem of investment strategy and draw, why would you not share the numbers? In fact, wouldn’t you want the person to use the numbers to exhibit their true preferences – i.e. to use the flexibility to maximise their utility? if the product contains the same kind of trade offs, but general rather than specific, they need to be transparent, or deconstructed. In fact, for a retail product that is advised, it is a requirement of the FCA’s suitability process. Without numbers, the famous 2-pager is pretty useless and with numbers the principles become self-evident and so the 2-pager is unnecessary.